Condos appreciating faster nationwide — SFRs still king in California

Is your real estate client focused on getting the most profit out of their next home purchase? Nationwide, condominiums (condos) are appreciating more quickly than single family residences (SFRs). This indicates condos may prove to be a smart real estate investment for today’s homebuyer — but it depends on where they’re shopping.

In California, condos appreciated an average of 6.3% from November 2014-November 2015, or $24,700 on average. SFR values increased slightly less, by 5.6%, or $24,300, according to data from Zillow. While condos have increased more quickly than SFRs in the Golden State, the difference is small enough to be insignificant. Further, when zeroing-in on specific metro areas, the gap between condo and SFR appreciation becomes mixed.

Across California’s largest metros, condo values have increased more rapidly than SFRs over the past year in Northern California — specifically the San Francisco and San Jose metropolitan areas. In Southern California — Los Angeles, San Diego and Riverside — SFRs continue to appreciate more quickly than condos.

Condos tend to be less costly than SFRs, smaller and in central locations, nearer to amenities, transportation and higher-paying jobs. These aspects are all attractive to first-time homebuyers, who are by and large members of the young adult cohort known as Generation Y (Gen Y), or Millennials.

Due to the unfortunate coincidence of entering the job market in the midst of the Great Recession, Millennials have less savings set aside than their parents’ generation. Thus, down payments are smaller and mortgage payments are limited. Hence the attraction of the relatively cheap home purchase found in condos. This is particularly important for Millennials seeking to buy near San Jose and San Francisco, where real estate prices are prohibitively high for most young paychecks.

In California, condo values average nearly 10% less than SFRs, a difference of $44,000 as of November 2015. The difference is more pronounced in California’s largest metros:

in San Jose, condos are $347,800 less expensive than SFRs;

in San Francisco, condos are $229,900 less expensive than SFRs;

in San Diego, condos are $173,500 less expensive than SFRs;

in Los Angeles, condos are $141,600 less expensive than SFRs; and

in Riverside, condos are $72,400 less expensive than SFRs, according to data from Zillow.

Since condos are within closer reach for first-time homebuyers, expect this segment of the housing market to experience higher rates of construction than SFRs in the coming years, particularly in Northern California, where condos save homebuyers the most. Multi-family construction has generally exceeded SFR construction throughout this recovery as demand for cheaper dwellings closer to jobs remains high.

One important factor to consider is the additional cost of Homeowners’ Association (HOA) fees, which are anything but cheap in most metros. Most costly in urban areas, HOA and condo fees can add hundreds of dollars to an owner’s monthly housing costs. In some cases, these extra fees can make SFR ownership cheaper by comparison despite the higher purchase price.

For homebuyers concerned with receiving the highest return on investment, condos may be the answer in urbanized, Northern California. But for much of California, SFRs provide the greater return — if homebuyers can qualify for the initial investment. Further, condo values tend to be more volatile than SFR prices, increasing more quickly in a rising housing market and falling faster in a declining market, which makes SFR values more stable.

Expect Southern California to follow the condo trend seen in Northern California later this decade as Millennials enter the homebuying market in earnest. During this next boom in home sales, SFRs will continue to rise, but condos will see the bulk of home appreciation.